Storage Watch: Is Microsoft Next?

The software giant Microsoft (MSFT -0.85%) has a long history of stock splits. The share count has been reshuffled nine times so far, and a single share from 1987 would be a basket of 288 Microsoft stubs today.

But Microsoft’s most recent stock split was in February 2003. Three decades on, and the stock is starting to look expensive. Many investors expect a tenth split fairly soon, especially since Microsoft is a member of the prestigious and price-weighted. Dow Jones Industrial Average (^DJI 0.09%) index. Allowing the stock price to rise much higher could inspire index managers to drop Microsoft from the component list and pick a lower-priced name.

Or so the thinking goes. Is there any substance to this argument though?

How important is the Microsoft Dow subscription?

Being a member of the Dow is a rare badge of honor. There are thousands of stocks in the US market, but only 30 get to be called “Dow stocks” at any given time. Abandoning popular indices such as the Dow Jones Industrial Average or S&P 500 (^GSPC 0.01%) it can be embarrassing. Some investors may sell their shares due to lower confidence in the stock’s long-term outlook.

That said, the market effects of joining or leaving a major index tend to be temporary. That membership card doesn’t make the holder immune to recessions and market swings. In fact, the Dow often lags behind broader market trackers such as the S&P 500 or Russell 3000 long term:

^ SPX data by YCharts

So Dow membership is a matter of honor, not an asset of material value that drives business. Still, holding onto that index spot could be important enough to force Microsoft’s hand. If nothing else, it would seem silly if the second-largest stock by total market value lost its Dow license because of a simple accounting quirk.

Dow prices rise

At the same time, I’m not so sure that S&P Global (SPGI 0.49%) the committee that manages the index listing will still ask Microsoft for a stock split.

First, a $420 Dow isn’t so outrageous anymore. UnitedHealth (UNH 1.54%) and Goldman Sachs (GS 0.37%) have even higher share prices; Home Depot (HD 0.54%) and Caterpillar (CAT 0.42%) I’m only a few dollars behind. Microsoft’s consistent share price represents just 6.6% of the Dow’s total value today. The average and median prices on the Dow are both around $200 per share.

In other words, high stock prices are not an automatic ticket out of Dowsville. Microsoft is a very important name on the list, but not a tyrant with an outsized influence on the value of the index.

Moreover, the Index Committee is not forced to divest Microsoft shares, even if they continue to rise. The group chooses 30 names from among “some of the largest U.S. companies,” taken from the S&P 500 index. Their discussions are always confidential, and the committee is free to “revise index policy” as needed. And even then, they can make exceptions to the revised regulation. If the five-person team from S&P Global and the Wall Street Journal wanted to bend the rules to keep Microsoft on the list, they would certainly have that power.

Splitting shares is not expensive

So Microsoft could keep its share count stable for the foreseeable future without harming the company, its stock, or its investors.

At the same time, there aren’t many downsides to taking the plunge into stock splits. Microsoft’s accounting team might work overtime to do the paperwork, but the actual move wouldn’t cost much.

Exchanges charge higher fees for a larger number of shares, but these fees are limited to a few hundred thousand dollars per year. There would be no change in Microsoft’s case, and it’s just a rounding error in the company’s earnings reports anyway.

Microsoft may not be splitting its stock any time soon

Against that background, I don’t expect Microsoft to announce a stock split in 2024 or 2025. The company might surprise me and make the move anyway, but it’s not a big deal. Stock splits don’t create value for investors, and we’ve shown you why the Dow ownership issue probably won’t force Microsoft’s hand.

And the company is in the business of software and computers — not maintaining a certain stock price or being a member of the Dow Jones. Investors should weigh Microsoft’s stock value against its business prospects, not an arbitrary accounting move.